Managing a property portfolio through a services company and impact on bank servicing.

A question for the savvy mortgage brokers out there.

I am thinking a establishing a company to assist with managing my property portfolio. I am finding the administration of the properties is increasingly taking up time, and want to put it onto a more structured footing. This will also be the first step in getting some of the admin work maybe done overseas for cheaper rates. And to start doing some work for other investors, not just myself. Will include tasks such property management, maintenance, book work, managing (self) insurance, renovations, etc, etc. Was also thinking about hiring a permanent part time maintenance person to do regular work on IPs and move away from individual PMs allocating ad hoc jobs when something has broken down. So, thought to establish a services company to do all this.

Before doing so, I was thinking about how this would impact servicing with the banks? Am keen to borrow more and expand the portfolio so I not inclined to do something that would negatively impact ability to borrow (ie servicing). My first thought is to say it doesn’t in that expenses associated with investment properties are ordinarily not accounted for in your living expenses, but are effectively brought to account in the 80% ‘shade’ (ie. banks take 80% of your rental income, with the remaining 20% to account for property costs like rates, etc). Whether you pay all expenses individually or pay through a services company should make no difference. Note that the services company will aim to reduce overall IP expenses by doing work more systematically and finding efficiencies. Does establishing a servicing company, paying a lump sum annual fee (per property) to manage all expenses on IPs change that equation from a individual servicing perspective?

 

Good questions.

More and more lenders are taking individual property expenses into a separate line item outside HEM for expenses (Westpac, ANZ, etc). I.e. not as part of the rental income shading, which is more for variations and volatility in the income itself rather than the property related expenses that are in play with investments. This is a big blow to investor servicing, as expenses have gone through the roof (add 3k+ in yearly expenses per property and expense calc are blown for mulct-property investors with a lot of lenders). They are doing a partial add back for the tax impact of these expenses though, but nonetheless, a blow to investors from these lenders (with more moving to this model over time).

For a scenario like this:

- this will just form part of that expense item listed on your servicing calc with these lenders. Others include property related expenses in their HEM calc (which isn't right), so there'd be little impact there unless your overall expenditure is above HEM. The specifics of your arrangement don't really change any of this, other than the total additional cost of doing it this way to your expenses that are noted when applying for a loan. If your above HEM, then this will reduce your servicing (by roughly 150 x the monthly additional expense, e.g. $200 per month = $30k hit to OO borrowing figures, and a bit more to inv figures). I've assumed your properties are held in personal names too.

- You may need to verify your rental income a little differently if it doesn't have a PM generated rental statements. In itself, if documented properly, this shouldn't be a problem (e.g. bank statements/lease agreements, etc). May be a bit of a pain, but you have someone engaged to take this admin hurdle away from you anyway.

- You may also need to obtain an accountant letter to note that the company doesn't have any outstanding liabilities and isn't drawing on personal funds (if it is loss making, it may need to be taken from your servicing as funds are being taken away from there).

 

I always thought the 80% shading was to account for property related costs. Now it appears to be for ‘volatility’. On that note, a PAYG income is arguably more volatile than rental income in that you can lose your job at any time, whereas income from a residential property less prone to those types of big reductions in my view. Yet, they don’t shade PAYG in any direct sense. All up, this change means a big reduction in borrowing capacity for those who derive substantial income from property. For these investors, the easing up of lending restrictions all but a myth.

 

There are 2 sides to this
a) you will be paying expenses as per normal so no change in serviceability. there

b) self employment. If you own shares in the management company the lender will want to see financials for the company - generally it would take 2 years for this income to be taken into account.
But it has to be running at a profit for the income to be taken into account. And then it would only be your share of the dividends as per your shareholdings.

 

Also note that the company may need a real estate licence.

 

This won't be an issue if you are the only holder of the property portfolio however if there's a trust ownership relationship or other owners (joint or unrelated parties), an agency licence will be required. If the properties are in different states, then multiple licences need to be held.

The holder of the agency licence will need to effect professional indemnity insurance.

 

From a tax perspective I wouldnt do this.

Rental income is passive income and reflects a return for use of the asset. You arent a PM or operating a property business and unless you have a huge number of properties this isnt at all advisable or logical. ATO would likely deny any costs paid where there is a tax benefit and on the basis it lacks commerciality. (Since you cant charge yourself for services and using a company may produce a tax benefit (?). But by using a company it will create a personal services income issue that is 100% avoidable. There is also the issue of workers compensation insurance etc. At best the company would incur a loss due to costs.

External services would involve GST and a range of state licensing and insurance concerns.

 

Just had nab owned advantage say living costs were too low on an application for someone with 5 properties. I thought they were one of the last lenders who included IP costs in the 20% shading. Not anymore apparently. I called my nab bdm to get her thoughts and she said they dont include the costs unless they see them in tax returns etc but me thinks if you are coming in close to HEM with a portfolio they will ask you to increase the costs to cover the basic holding costs of rates, water rates, land tax etc.

 

In practical application I don't see that this would improve serviceability. If anything, having additional administrative costs of an additional business would reduce servicing.

You've also got to ask yourself, is this model going to be a better property manager? I seriously doubt it.

 

Its double dipping. 20% shading - which should cover the costs plus adding in the costs themselves.

 

a longer term strategy which could improve serviceability is to set up a genuine business doing this. Get a few friends properties to manage as well. not sure how many you could need to turn a profit, but any profit would then be further servicing income.